M&A Report 2023: Romania
Razvan Stoicescu, Musat & Asociatii
The Romanian M&A environment remains appealing, yet relatively volatile due to developments in the Russia–Ukraine war, and Romania's neighbouring position to the conflict zone. Local businesses have not been immune to the global and European economic fluctuations (rising energy prices, increasing inflation, pressure on salaries), and this creates opportunities for inbound investors, either speculative or strategic.
The most attractive sector continues to be technology, where Romania still holds a skilled workforce and is able to provide competitive labour costs, and real estate, where the demand for residential, commercial and industrial property has been on the rise. Deals in the energy industry have also been notable, with two of the largest transactions happening in the sector; namely:
The acquisition by Romgaz of ExxonMobil E&P Romania ($1.06 billion); and
The acquisition by Public Power Corp. of the Romanian business of Enel (€1.26 billion, or approximately $1.38 billion).
Renewables have also attracted foreign investments, while efforts to reduce fossil fuel dependency have increased.
Non-EU foreign investors may run into challenges in terms of bureaucracy and the speed of administrative processes. While acquisitions of companies are structured mostly as share deals, in which parties enjoy substantial contractual freedom, Romania has recently implemented the EU regulatory clearance regime for foreign direct investments, which can easily add three to eight months to any closing with a non-EU established investor.
The market is driven by private M&A deals, with public M&A deals taking a modest second place, according to public sources, with 25 IPOs versus 220 private M&A deals. The trend matches the evolution of the European markets, however, with a substantial number of issuers delaying or rethinking their capital markets offering strategies to account for the economic context.
In Romania, however, private M&A deals have traditionally exceeded public M&A, especially due to the more regulated environment of the latter. While IPOs have been announced for 2023 (see Hidrolelectrica, an electricity production company and the main provider of technological services required in the National Energy System in Romania), private M&A will undoubtedly maintain their lead, considering the more regulated regime and deal complexity attached to IPOs locally.
Economic recovery plans
According to public sources, M&A deal flow reached a record high for Romania in 2022, with a transaction total of $6.6 billion and 258 transactions recorded. This represented a 26% increase on the deal count of 2021 (205) and a 72% increase on the deal count of 2020 (150).
In the current political and economic climate, it is difficult to make any predictions about the deal flow for 2023. The market does appear relatively reserved, with public sources expecting a slow first half of the year in terms of the number of deals. Nevertheless. Romania remains an excellent opportunity for M&A deals, harbouring many information technology and communications, real estate, agriculture, and energy-related businesses worth acquiring or investing in.
There are several factors that have shaped deal structures recently, including:
The global economic downturn;
The systemic instability fuelled by the collapse of two Californian banks and the buyout of Credit Suisse by UBS to halt a banking crisis;
The war in Ukraine;
Supply chain disruptions; and
Tightening regulatory scrutiny.
These factors have triggered a revision in valuations and create opportunities for buyers to achieve better pricing, or push for better purchase terms altogether. They also foster lessened competition for deals and new assets coming to market, including from distressed situations.
Public sources show the majority of deals on the Romanian market are made by strategic investors looking for long-term growth opportunities (between and 88% and 90% of all deals). For the time being, financial investors have played a less influential role on the market, but this may change in the current difficult economic context, which may create opportunities for acquisitions of distressed assets.
Legislation and policy changes
Acquisitions of private companies are generally structured as share deals, and more rarely as asset or business transfers. These deals are subject to general rules on contracts as set forth by the Romanian Civil Code. Except for some regulatory clearances – which may be necessary, depending on the circumstances – these deals are not supervised and parties have significant contractual freedom.
Acquisitions of public companies require market operations, and are supervised by the Romanian Financial Services Authority, which has responsibility for the approval of all prospectuses and offerings.
Also, the Romanian Competition Council, which is responsible for competition compliance at the local level, and the Commission for the assessment of foreign direct investments are the key bodies generally involved in the closing process of any local M&A deal in terms of regulatory clearances.
COVID has not resulted in legislative changes that have had an impact on M&A transactions. The most notable change for 2022 was the introduction of more stringent rules on the approval of foreign direct investments in Romania, in line with EU regulations. Since 2022, any non-EU investor intending to invest over €2 million in Romania, through a greenfield investment or through an expansion of an existing investment, that is active in a number of loosely identified sectors under Romanian law must obtain prior approval of the commission for the assessment of foreign direct investments. Standstill is mandatory and fines are determined in relation to the turnover of the offending party.
The legislation applies not only to plain M&A deals but also to any other sort of investment by which long-term ties with Romanian companies are established, and this makes it extremely relevant for non-EU investors, especially since the process is also relatively time consuming.
ESG is picking up locally. Buyers have begun to evaluate ESG risks and opportunities in the target’s business. As a result, it is becoming more common for local private companies to be mindful of their ESG practices generally and to prepare ESG information at the early stages of a deal. Having said this, both types of deals have been seen locally, with and without an ESG focus, and the degree of ESG adherence of a target is not yet a deal breaker locally.
COVID has become a part of daily life. There have been changes at the level of material adverse change, material adverse effect, or force majeure clauses where COVID or similar pandemics are now explicitly excluded. However, other than these, M&A agreements have remained consistent with pre-pandemic practice.
The legislative climate is relatively stable and predictable in terms of M&A deals. However, as mentioned earlier, non-EU investors should keep an eye on their compliance with the Romanian foreign direct investment rules, as these procedures have an impact of the timetable of any deal or future investment, and default triggers substantial fines.
Practice insight/market norms
There is a popular misconception that Romanian law and jurisdiction may not be an adequate choice for M&A deals. With abundant practice, there are many advantages in choosing Romanian law and jurisdiction in cases where enforcement will be carried out in Romania. The author’s conclusion, after performing a comparative analysis with English and Welsh law, for example, is that issues and solutions pertaining to M&A deals are relatively similar. And now, with Brexit, having a ruling issued in Romania may even be superior to a UK-issued one.
The most often asked questions relate to how a court of law will apply Romanian law to an M&A deal. Each of the seller and buyer is particularly concerned about:
The extent of its liability;
The effects of carrying out due diligence against the liability of the seller;
The extent of the indemnification the buyer may receive for a breach of warranties and indemnities by the seller;
If any limitation clauses are enforceable;
What is the meaning of fraud, or intent; and
Whether fraud still exists when information is only partially disclosed in the virtual data room (VDR).
Especially for foreign investors used to specific standards under foreign law, understanding the differences under Romanian law is essential in negotiating sale and purchase agreements, representations and warranties insurance, and related protection. M&A deals have been going on for decades in the jurisdiction, so the process is generally well understood and well planned.
Technology plays an important role in the dealmaking process. A VDR is the backbone of any M&A deal, streamlining disclosure workflows between the parties. AI review of VDR documents is also a new trend aimed at reducing the time spent reviewing documents.
While AI is developing and cannot yet replace a lawyer, using it to flag key elements of interest, or to automate manual or laborious and repetitive tasks, can be a real cost and time saver, leaving more time for interpretation and decision making.
Lastly, data analytics, especially for operational and financial matters, is a next step in measuring key performance indicators of the target, in trying to identify hidden patterns in data that may be missed by human review.
So while lawyer review is still indispensable, technology is becoming increasingly effective at optimising the dealmaking process.
Several factors are involved in obtaining control locally:
Company valuation, and the availability of the bidder to offer a control premium; i.e. a price well in excess of the regulated offer price;
The ability to evidence readily available funds for the purposes of payment of the offer price;
The availability to carry out a takeover bid and, potentially, a squeeze-out; and
The bidder's ability to obtain necessary regulatory clearances (from the Romanian Financial Services Authority, from the Romanian Competition Council, where applicable, or under the foreign direct investment regulation in the case of non-EU bidders).
Romania does not have a takeover code. However, there are rules governing takeovers, including mandatory takeovers, for public companies, which are in line with EU regulations (particularly, Directive 2004/25/EC on takeover bids). Essentially, in the case of public companies, the takeover bid has to be addressed to all shareholders and for all their shares. The takeover may be friendly or hostile. Also, the ‘breakthrough rule’ (Article 11 of Directive 2004/25/EC on takeover bids) has been implemented under local law, but companies have to opt in to it.
Mandatory takeovers are also possible when specific thresholds are exceeded (usually, over 33% of the voting rights, but there are exceptions). In such cases, the bidder has to launch a takeover bid as soon as possible, but in any event not later than two months from the date the exceeding position was reached. Until such time of the bid, voting rights attached to the exceeding position are suspended.
A squeeze-out is also permitted if the bidder that has launched a takeover offer has acquired more than 95% of the shares and voting rights in the company, or more than 90% of the shares and voting rights during the takeover.
COVID has not impacted takeover legislation; however, lockdown led the Romanian legislator temporarily to allow the organisation of general meetings of shareholders via remote means.
The bidder is liable for all damages caused to the company that is the subject of the takeover bid if it is proven that the bid was launched exclusively for the purpose of stopping the company from not taking certain economic measures or carrying out operations.
The local market is aligned with international practice. Especially in this volatile environment, sellers push for locked-box mechanics, while buyers push for completion accounts with payments held in escrow; in some cases, even post completion. Earn-out mechanics are also used in cases where the seller holds a key role in the business, and the buyer wishes to ensure a certain performance post closing, pending transition, during the earn-out period. These are, however, a bit rarer, with completion account approaches being prevalent.
Warranty and indemnity (W&I) insurance has become more common locally, with sellers increasingly requiring buyers to acquire such protection. Local brokers have also become very familiar with the product, so taking W&I insurance in Romania is relatively easy.
Takeovers are not specifically regulated for private companies. In these cases, the general rules in private M&A deals apply.
Foreign-law M&A deals are common, especially in cases where buyers have deemed such foreign law to provide additional protection to that of Romanian law. Where a foreign-law deal is implemented, a short-form Romanian law is also generally concluded for filing purposes.
The majority of exits happen through trade sales, with strategic investors. Deals are made under general rules in private M&A. No notable exit IPOs were reported during 2022.
The Romanian M&A market is relatively small, which makes it more vulnerable to external fluctuations, such as rising inflation, increases in the prices of energy, and the conflict in Ukraine. It is difficult to make a meaningful prediction, especially given the situation in Ukraine. In any event, business lawyers will find solutions to any issues a transaction may run into, even in this context.